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Are infrastructure projects good for the economy?

Bent Flyvbjerg who works at Saïd Business School, University of Oxford, wrote a paper entitled: “Survival of the unfittest: why the worst infrastructure gets built—and what we can do about it”. The investigation studied 258 projects in 20 countries which included rail, road, tunnel and bridge constructions. These projects cost from hundreds of millions of dollars to billions. For rail projects the average cost overrun was 44.7% and the average overestimation of passenger traffic was 105.6%.

Among the observations made in the report are the following:

“We conclude that if techniques and skills for arriving at accurate cost and traffic forecasts have improved over time, these improvements have not resulted in an increase in the accuracy of forecasts”.

“From an economic point of view the projects should never have been built, at least not in the form they were. They survived because benefit–cost ratios presented to investors and legislators were hugely inflated, deliberately or not”.

The author then goes on to investigate the possible explanation for cost overruns and benefit shortfalls. He suggests they may be caused by technical, psychological, or political-economic reasons. Further investigation leads to him reach the following views: “Finally, political-economic explanations and strategic misrepresentation account well for the systematic underestimation of costs and overestimation of benefits found in the data. ………… A key question for explanations in terms of strategic misrepresentation is whether estimates of costs and benefits are intentionally biased to serve the interests of promoters in getting projects started”.

“In sum, the UK study shows that strong interests and strong incentives exist at the project approval stage to present projects as favourably as possible—that is, with benefits emphasized and costs and risks de-emphasized”.

“Nevertheless, seemingly rational forecasts that underestimate costs and overestimate benefits have long been an established formula for project approval as we saw above…… The consequence is, as even one of the industry’s own organs, the Oxford-based Major Projects Association, acknowledges, that too many projects proceed that should not”.

“In this situation, the question is not so much what project managers can do to reduce inaccuracy and risk in forecasting, but what others can do to impose on project managers the checks and balances that would give managers the incentive to stop producing biased forecasts and begin to work according to their Code of Ethics…… Better forecasting techniques and appeals to ethics will not do here; organizational change with a focus on transparency and accountability is necessary”.

In the conclusions of his report he observes:

“The article shows that such differences between estimated and actual outcomes are pronounced for large infrastructure projects, where substantial cost underestimates often combine with equally significant benefit overestimates, rendering cost–benefit analyses of projects not only inaccurate but biased”.

“But the projects that are artificially made to look best in business cases are the projects that generate the highest cost overruns and benefit shortfalls in reality, resulting in a significant trend for ‘survival of the unfittest’ for infrastructure projects”.

“The cure to the problem is enforcing an outside view in the planning of new projects and employing a method called reference class forecasting, based on Daniel Kahneman’s Nobel Prize-winning theories of decision-making under uncertainty. However, to be effective such new methodology must be combined with better governance structures with incentives that reward accurate estimates of costs and benefits and punish inaccurate ones”.

“Finally, stimulus spending has recently resulted in extra money and attention for infrastructure investing. This is placing increased pressure on project delivery. Stimulus spending—together with rapidly increasing spending on infrastructure in emerging economies and on information technology in infrastructure—is driving infrastructure investment from the frying pan into the fire”.

As this study was published in 2009, there has been time to take its lessons on board.

Reproduced from: Bent Flyvbjerg. Survival of the unfittest: why the worst infrastructure gets built-and what we can do about it. Oxf Rev Econ Policy (2009) 25(3): 344-367 doi:10.1093/oxrep/grp024. By permission of Oxford University Press on behalf of The Oxford Review of Economic Policy Ltd. The published article is available online at http://oxrep.oxfordjournals.org/content/25/3/344.full.pdf+html

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By sheer coincidence I’ve been preparing a short video presentation on a similar subject, why Public Works Don’t Work. I launch it last night.

Part of the Prosperity Plan this is an alternative viewpoint on the future of the UK economy (and an alternative to HS2) which offers substantial benefits at NO cost to the Treasury and new innovative technologies for future economic growth.

The problem is how to convince or change the government to get such a plan adopted.

Good video. You make a valid point. But when it comes to convincing or changing governments…

Governments love big projects because they add directly to GDP in the short term, and they can brag about it, even though in the long run they will destroy more value than they created.

It’s governments that create economic crises in the first place, and then, when under pressure to ‘Do Something’ they do things that make it worse! So we end up in a viscous circle that takes us from bad to worse. The trouble is that with all their think tanks and highly cleaver people, they know this but can’t stop it. It’s like a runaway train that can’t be stopped until it crashes.

this assumes the project is best conceived. Currently HS2 may not be best for the rail path shorfalls on ecml and wcml. Then the project is not about the costs and benefits but all the opportunites lost. changing the original remit is the main factor to repair the plan.

I’ve seen articles that have used Flyvbjerg,s figures to look at HS2. If costs overrun and benefits do not materialise by the usual amount for a rail project, and you work with the DfT estimates on both, this would mean that HS2, far from providing a positive benefit to the taxpayer, or even breaking even, would generate a loss of 79p on every £1 spent.